Keep student loan debt in mind as your kid shops for colleges

The campus of University of Puget Sound in Tacoma, Feb. 9, 2017. Peter Haleyphaley@thenewstribune.com

The campus of University of Puget Sound in Tacoma, Feb. 9, 2017. Peter Haleyphaley@thenewstribune.com

It is peak season for high school seniors and their parents to receive and evaluate financial aid offers from colleges.

Aid offers can be confusing and don’t always compare clearly from one college to the next. The finances can be complicated by the fact that it’s an important transitional time for students, and they likely have an emotional attachment to one preferred college before they receive their aid package. That can spark a difficult conversation, but one that is important for the student and the parent, as it could impact both of their financial situations for years beyond college.

Even once you’ve settled on a best-fit school, it can be hard to map out exactly how you will pay for it — not only for the tuition deposit due soon but how you will cover potential loan payments after college.

Sixty-six percent of recent graduates from public colleges had loans averaging $25,550. Three quarters of private nonprofit college graduates held loans averaging $32,300.

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Of course, many parents carry loans separately, some for a very long time. Americans over 60 hold $86 billion in student loans, impeding their ability to retire.

Student loan debt has grown massively in the past decade while other forms of debt have not. Total U.S. mortgage debt is 4 percent lower than it was during the financial crisis of 2008. Student loan debt is 131 percent higher. Student loan debt is not forgivable in bankruptcy.

The average student loan payment not in deferment is $393 per month. For graduates who receive career-type jobs, this is a manageable level of debt as part of a budget. Problems arise quickly at higher debt balances. That is a territory where you would prefer not to be above average.

Oh, but those loans are so easy to qualify for. Some students have debt reaching six figures, even though it seemed like they got a generous financial aid offer. This could occur if you receive an offer from a private college that has an unsubsidized annual cost of $65,000. The college offers scholarships, grants and work study for $40,000 per year, but you still have $25,000 per year in loans. You graduate in four years at age 22 with $100,000 of debt.

Suppose you wish to have it paid off by 30, so that you can focus on other necessary steps in your pursuit of financial security. Assuming a 6 percent interest rate on the loan, you would have to pay $1,314 per month to achieve your goal, and the total cost after inclusion of interest would be $126,144.

If you earn $50,516 per year (the average first-year college grad income), you would be directing nearly a third of your pre-tax income to student loans. Add up other expenses, and you see how it could be very difficult to have any savings. That is one reason why nearly a third of eligible employees do not participate in a company retirement plan, many of them passing up on free money via employer matching contributions at a time when those matching contributions are most valuable to them.

To keep debt service more manageable, it might be best to not take on more debt than the expected first-year gross salary. Excessive student loans can force you to think differently about what kind of job and salary you can accept, where and how you’ll live, how you’ll be able to save for a home down payment, your retirement, or at some point, possibly your kids’ college savings.

The $1.5 trillion student loan debt nationwide is one reason millennials are marrying later, buying homes later and struggling to separate themselves from a financial burden that lasts well beyond the college years for some.

You go to college to educate yourself, become a knowledgeable, resourceful person who hopefully has enough practical and emotional skills to command a salary that helps you achieve financial freedom, not to accumulate so much debt that it dictates your financial life for decades. Unfortunately, the net price is usually the last piece of information received in the selection process. It can disrupt plans and create uncomfortable decisions. That’s why it’s best to be realistic about cost from the outset of your search, not only at the end when comparing offers.

You can’t predict your future. You won’t know exactly what kind of job prospects you will have, what your cost of living will be or a number of other personal finance factors that will evolve after college. But the more you consider it now and leave yourself a lower hurdle to clear later, the easier it may be to build real financial security.

Gary Brooks is a certified financial planner and the president of BHJ Wealth Advisors, a registered investment adviser in Gig Harbor.